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Heterogeneous physicians, lawsuit costs, and the negligence rule

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  • Olbrich, Anja
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    Abstract

    Real-world observations of negligent and defensive medicine challenge malpractice liability. Based on a principal-agent model with two types of physicians I show that lawsuit costs affect the patients' decision to sue and the physicians' level of care under the negligence rule, leading to a separated equilibrium in care. Given these conditions, punitive damages allow for a pooled equilibrium where all physicians exert first-best care. If courts cannot use punitive damages, a second-best solution arises with an optimal negligence standard that deviates from first-best care.

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    File URL: http://www.sciencedirect.com/science/article/B6V7M-4RDS1R2-1/1/eb28f666ff006dda65d7009260ea641b
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    Bibliographic Info

    Article provided by Elsevier in its journal International Review of Law and Economics.

    Volume (Year): 28 (2008)
    Issue (Month): 1 (March)
    Pages: 78-88

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    Handle: RePEc:eee:irlaec:v:28:y:2008:i:1:p:78-88

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    Web page: http://www.elsevier.com/locate/irle

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    1. P. A. Diamond, 1973. "Single Activity Accidents," Working papers 113, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. A. Mitchell Polinsky & Yeon-Koo Che, 1991. "Decoupling Liability: Optimal Incentives for Care and Litigation," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 562-570, Winter.
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    6. Chalkley, Martin & Malcomson, James M., 1998. "Contracting for health services when patient demand does not reflect quality," Journal of Health Economics, Elsevier, vol. 17(1), pages 1-19, January.
    7. Kessler, Daniel & McClellan, Mark, 2002. "Malpractice law and health care reform: optimal liability policy in an era of managed care," Journal of Public Economics, Elsevier, vol. 84(2), pages 175-197, May.
    8. Edlin, Aaron S., 1994. "Efficient standards of due care: Should courts find more parties negligent under comparative negligence?," International Review of Law and Economics, Elsevier, vol. 14(1), pages 21-34, March.
    9. Polinsky, A Mitchell & Shavell, Steven, 1989. "Legal Error, Litigation, and the Incentive to Obey the Law," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 99-108, Spring.
    10. Kessler, Daniel P. & McClellan, Mark B., 2002. "How liability law affects medical productivity," Journal of Health Economics, Elsevier, vol. 21(6), pages 931-955, November.
    11. Daniel P. Kessler & Mark McClellan, 1996. "Do Doctors Practice Defensive Medicine?," NBER Working Papers 5466, National Bureau of Economic Research, Inc.
    12. Henry S. Farber & Michelle J. White, 1991. "Medical Malpractice: An Empirical Examination of the Litigation Process," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 199-217, Summer.
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